Key steps to consider before you sell your business
I was recently talking with my friend, Douglas, who works with his dad in their family-owned business. We were discussing how a feasibility study evaluates whether a new venture will be possible and profitable. Douglas commented that for his family-owned business “We’re on the other side of that problem in a way. We’ve built our company up over 40 years. We’re profitable. We have a substantial presence in the industry. But we're looking to sell the company and we haven't spent the time building a turnkey infrastructure (like standardized operating procedures). Too many decisions hinge on too few people. We need some structure to the back office side of our business. Like, I don't have to ask anyone's permission to buy something. I just buy stuff. All. The. Time. I love it, but it's no way to run a business.”
Determine your exit strategy. When I learned to draft a business plan, a key component was to consider the exit strategy for the business. Was the goal to:
Pass the business on to the owner’s children to continue a family-owned business?
Outright sell the business to the managers, employees, or outside buyers?
Systematically liquidate because the company has immediate profit opportunities, but not long-term?
Consider your potential buyer. This ties to your plan for an exit strategy. If you are passing the business on to your children, you will need to determine your expectations for payment in retirement – whether it is rent for the land or an agreed upon buy-out price paid over a number of years. If you are selling the business outside of the family, you will need to look at what level of detail of financial records the purchaser will want to see.
- Develop strong procedures. A lack of consistent procedures that are adhered to will limit the ability of the business to grow and last beyond the current owner. By developing, documenting, and implementing procedures, the firm becomes scalable, less reliant on one person, and consistent in its relationships with customers and vendors. This also facilitates the transition of the business to a new owner.
- Tighten up your books. Although the owners may have agreed to cover the cost of cell phones for family members and season tickets to the local sports team, a buyer of the business wants to be able to see what the business is actually generating. Those personal items that have been expensed in the business will need to be identified and pulled out. Depending on the buyer, if books have been maintained on a cash basis, the buyer may want to see the books presented in a Generally Accepted Accounting Principles (GAAP) basis.
- Organize documents. This may include the following:
- Pull together three to four years of financial statements and tax returns.
- Locate current lease and loan documents.
- Create a list of customer and vendor contacts.
- Identify your assets. Keep an inventory of your vehicles and equipment. If you do not have one already, a good place to start is with your depreciation schedule from your tax accountant. Verify you can identify the items listed as well as determine which items may not have made it onto the schedule.
Often by the time many business owners consider their exit strategy, like Douglas, they are ready to exit. By thinking through these six points and taking action early on, you can make your company more prepared and attractive to sell.